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Call for deeper European integration

Mon, May 21, 2012, 01:00

A European growth pact and deeper political integration in the euro zone could bolster the currency union, but there must be no softening of the bloc's fiscal pact on budget discipline, ECB policymaker Joerg Asmussen said today.

Presenting a vision for Europe over the next 10 years, Mr Asmussen, who joined the ECB's Executive Board this year after serving as German deputy finance minister, said the right crisis response was "not less, but more Europe" and that fiscal union was ultimately the right path.

There is a growing push in the euro zone, led by newly elected French president Francois Hollande, to do more to stimulate growth and not just focus on reducing deficits - German chancellor Angela Merkel's mantra.

Mr Asmussen said the debate on growth versus austerity was the "wrong debate" to hold."We need both," he said in a speech in Berlin, though he stressed the need for fiscal consolidation and reforms."The fiscal compact can be complemented by growth-enhancing measures. This makes sense as a supplement, but the fiscal compact cannot be renegotiated or softened," he said.

The ECB has helped fight the debt crisis by cutting interest rates to a record low of 1 per cent, flooding financial markets with more than €1 trillion in three-year loans and buying struggling euro zone countries' bonds in the secondary market.

Mr Asmussen stressed that the ECB's non-standard measures were of a temporary nature and could be withdrawn any time if inflation risks emerged.

ECB vice president Vitor Constancio told an audience in Japan that it was still too early to end the ECB's extraordinary crisis support measures."The exit will come some day, but certainly not now," Mr Constancio said.

"We would need to reduce liquidity to go back to normal times. We can use repos and sterilisation. The tools are there."

Mr Asmussen, in his speech, laid out what a growth pact could look like and how a more closely integrated currency union could work, picking up the baton from ECB president Mario Draghi, who had called for a vision for Europe's future earlier this month.

Mr Asmussen suggested adding goods and labour market reforms to the existing fiscal compact. Such reforms could, for example, boost the mobility of the labour force and include offering language courses and a European network for job placement, which Mr Asmussen said could be financed via the European Investment Bank or so-called project bonds unde r written by the EU budget to finance infrastructure.

"The growth-enhancing measures will only have an impact, if a critical mass is implemented. The legal form that the measures then take is less important," Asmussen said.Asmussen stressed that such project bonds were not the same as jointly issued euro bonds, an idea which Hollande and some other euro zone leaders are expected to promote at an informal summit in Brussels this week.

Germany reiterated its opposition to the introduction of euro bonds.Germany has said it will only consider jointly underwritten euro area bonds once the conditions are right, meaning closer economic integration and coordination across the euro zone,

including on fiscal matters. But this is still a long way off.

Mr Asmussen said strengthening the euro zone was key for Europe's future, and ultimately, a fiscal union as well as a banking union and a democratically legitimate political union were needed to stabilise the currency union.

He pointed to the need for a homogeneous Europe-wide financial regulation framework and a joint financial market watchdog for financial institutions operating across borders, as well as a bank resolution mechanism.To bolster fiscal unity in the euro area, Mr Asmussen suggested launching a special fund from the EU budget and potentially a financial transaction tax - currently under discussion - which would also strengthen the European Parliament.

"Usually one is more careful with expenditures if one is also responsible to raise the necessary income. This could be done step by step for the European Parliament, for example a financial transaction tax could feed into such a special fund along with the EU budget if such a tax was implemented in the euro area alone," Mr Asmussen said.

The EU's Economic and Financial Committee could also get together on a euro zone level, he said.In a sign of an intensification of the debt crisis, it emerged last week that the ECB had stopped providing liquidity to some Greek banks as they had not been sufficiently recapitalised.Asmussen said four Greek banks currently had no access to the ECB regular liquidity operations because they were not sufficiently capitalised and were now on emergency liquidity assistance (ELA), provided by the Greek central bank.